Cargo Insurance: Prepare for the Worst

Recently, tragedy struck the Yantian Express, a Hapag-Lloyd container ship, when a container fire broke out from the ship’s deck when it was traveling off the east coast of Canada. On January 3, 2019, a fire started from a single container on the forward part of the ship’s deck, which eventually spread to other containers.

It took weeks before the fire was fully extinguished. Rescuers responded immediately, but weather problems hampered operations which caused delays in stabilizing the incident. The severity of the incident led all 24 crew members to abandon ship. Fortunately, no one was harmed and all were able to evacuate to another ship safely.

General Average

A few weeks after the incident, Hapag-Lloyd declared general average on the Yantian Express. This declaration has intensified the need for shippers and cargo owners to secure cargo insurance for their shipments. General Average (GA) is a principle of maritime law wherein all parties that are financially involved in a voyage have proportional share of the loss when there is an emergency. There is a common loss when an accident happens.

A classic example would be when there is a need for cargoes to be jettisoned or thrown off board in order to lighten the ship in a storm. The crew members have to decide whose cargo should be thrown off the ship, but they don’t have the time to do that. The owners of the cargoes that were safe have to make a contribution, based on a percentage, to the owners of the affected cargoes – everybody shares the burden not just those who have lost their cargoes.

Hapag Lloyd appointed Richards Hogg Lindley to determine, evaluate and collect the General Average. This estimation and inspection will take weeks and will result in the shippers paying huge amounts to cover damages and having to wait excruciatingly long before they can retrieve their containers. It was reported that 202 containers on board were declared to be total losses. During a GA declaration, owners are responsible to appoint their own average adjusters, specialists responsible for the claims, to coordinate securities, payments, and documents with the GA securities, payments and documentation.

Settling the claims can sometimes take years before it is fully handled because of the complexities of the entire process of recovering the damages. Last March 2018, another GA, one of the biggest ever declared, was declared by MSC in relation to the serious fire that broke out on Maersk Honam. On this ill-fated incident, five of its crew members lost their lives. Owners that failed to comply with the GA claims were liable to pay for the storage and demurrage costs. During the investigation, it was revealed that 30% of the cargo was uninsured.

Insure to be Sure

An expert says that 30 – 50% of cargoes travel without insurance. This is very risky considering that more and more news of emergencies happening to cargo ships while traveling arise. If cargo insurance is not in place, as discussed above, it takes years to resolve GA issues. The average adjuster will require the shipper to provide a cash deposit equivalent to 12% of the commercial value of the affected shipments on top of another 12% for ocean freight charges. Failure to secure the necessary payments within the given free time will result in additional costs for the detention, demurrage, and storage costs, which is a strain for the finances of any business.

This is where cargo insurance plays a big role: when there is cargo insurance, the insurance company will now be responsible for providing the bond or guarantee and will handle the contribution for the losses. In an event of a GA declaration, the insurance company will deal with the average adjusters and provide them with an assurance to satisfy the terms of all GA matters, which leads to the timely release of undamaged goods. If your cargo has been lost or damaged in the accident, the insurance company will settle everything for you, no need to wait for years to be paid.

Right now, in any part of the supply chain, there will always be risks but you can always be one step ahead and reduce those risks. Cargo insurance is not a want but a need, a need to help in minimizing one’s risk in cases of emergencies. Before transporting any goods, be sure to always secure cargo insurance. It will help protect your cargo and will help in settling any claims, which ultimately will make your life easier.

Yes, there is a cost for insurance. However, the cost is small compared to the strain GA claims can put on a business.  Securing cargo insurance will always be a wise decision. If you need assistance with securing cargo insurance, Gallagher can help. Call 303-365-1000 or email us anytime!